GE's Welch rejects Honeywell's plan

He says Honeywell proposal 'makes no sense'

By

JonFriedman

MikeMaynard

MORRIS TOWNSHIP, N.J. (CBS.MW) -- General Electric's plan to buy Honeywell may be receiving last rites after GE Chairman Jack Welch strongly rejected an apparent last-ditch offer to resuscitate the deal, which has been blocked by European regulators.

Honeywell CEO Michael Bonsignore, in a letter to Welch on Friday, indicated a willingness to slash GE's purchase price by up to $2 billion. Yet Welch, in typically blunt language, said his counterpart's plan "makes no sense" for GE shareholders.

Shares of Honeywell closed down $3.21, or 8.4 percent, to $34.99. Honeywell stock had declined to a session low of $33. Trading in Honeywell spiked, reaching nearly 52 million shares versus average daily volume of about 8 million, as arbitrageurs unwound trading positions.

GE's shares edged up 13 cents to $49 on above-average volume of more than 50 million shares.

By agreeing to reduce the price of the deal, Honeywell would be compensating GE for any loss of value tied to proposed revisions to the stock-for-stock deal while at the same time seeking to satisfy European antitrust concerns that threaten the massive acquisition.

In his letter Bonsignore spelled out several moves designed to address concerns that have blocked the European Commission's approval of the deal.

When announced last October, the transaction between the two Dow Jones Industrial Average components carried a value of $41 billion.

The centerpiece of Bonsignore's proposal is a reduction in the exchange ratio between shares of GE
GE, -1.68%
and Honeywell
HON, -1.04%
As proposed, GE would swap 1.01 shares for each outstanding Honeywell common share, down from the originally negotiated 1.055 shares.

"We must move quickly," Bonsignore said in the letter to Welch. "Indeed, we must amend the merger agreement and announce any change in the exchange ratio no later than Saturday."

The European Commission, the economic-competition arm of the European Union, has said that it will rule by July 12 on whether the acquisition passes muster on an antitrust basis.

The 11th-hour Honeywell offer and GE's reply were only the latest twists in a month-long battle by the two industrial giants to satisfy European regulatory concerns and complete the deal. European Commission Chairman Mario Monti, Welch and Bonsignore had a conversation as recently as Thursday on the matter, according to Bonsignore's letter.

The terms of a revised merger agreement must be submitted by July 3 to the European Commission, which recently refused to approve the takeover because it feared that GE-Honeywell would have an unfair competitive edge in the area of aviation and aerospace services.

However, the Brussels-based organization quickly announced it would have no response to the Honeywell proposal and reiterated July 12 as the deadline for its ruling -- implying that the door may well remain open to further negotiations.

Gist of the proposal

Bonsignore said the Honeywell board had authorized him to make the revised exchange offer of 1.01 shares.

In addition, he proposed that GE and Honeywell agree to sell 19.9 percent of GE Capital Aviation Services, which leases a fleet of jets to customers around the world.

This would be in line with what Monti recently demanded as a key condition for approval of the acquisition. GE refused to go along, making a counteroffer with Honeywell proposing some $2.2 billion in divestitures.

In the letter the Welch, Bonsignore said he believes GE and Honeywell should agree to follow through on these divestitures along with the proposed sale of the 19.9 percent stake.

Last October, GE announced the deal to acquire Honeywell in what would be the biggest deal in GE's history.

Even though GE President Jeffrey Immelt all but said publicly that the deal was dead after Monti came forth with conditions, the parties have kept at it trying to fashion a resolution to the impasse.

In the U.S., analysts, speaking before the GE response to the Honeywell offer, continued to stress that they believe Welch would press to complete the proposed acquisition of Honeywell.

Welch's presence in the negotiations is critical. He took the extraordinary measure of delaying his previously announced plan to retire until GE wrapped up the deal.

For Welch, analysts said, the deal is appealing because it would accomplish several goals. It would fortify GE, potentially enhance shareholder value and provide a flattering conclusion to Welch's two-decade management of the conglomerate.

"I'm putting my money on Jack Welch," said Porter Bibb, head of Technology Partners, a merchant bank in New York. "He sees this as the capstone to his career and a boost to GE stockholders. The deal is not dead yet."

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